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The debate over the responsibilities brokers have to clients when selling them mutual funds is a pretty colorful one. Brokers are often demonized as craven salespeople, putting clients into the funds that offer the biggest kickbacks. Others argue that brokers are more highly regulated than independent advisors, and take the needs of their clients seriously. This is the basis for much of the debate as to whether there should be a universal standard that all investment professionals must adhere to.

A new study, published in the February issue of the Journal of Finance, is the first to clearly demonstrate that how brokers get paid does indeed affect fund flows—and performance.

Brokers are paid three ways:

• Funds that charge an upfront sales load give a big chunk of it (75%-to-80%) to the broker. Sales loads—often stated to be as high as 4.75%—are often reduced to a more-typical 2.77%, but are always taken out of your initial investment.

• The ongoing 12b-1 fee, which is capped at 1% and always taken out of fund assets, also goes to the broker.

• Revenue-sharing agreements, in which the fund's management agrees to share with the broker a portion of the management fees it assesses (which also come out of a fund's assets and aren't subject to any regulatory limits or disclosure requirements).

Given the debates going on, "this seemed like an opportunity to see if incentives have a bearing on how money gets allocated," says Susan Christoffersen, an associate professor of finance at the University of Toronto who produced the study along with Richard Evans at the University of Virginia and David Musto at the University of Pennsylvania. And yes, they do.

The study made a distinction between captive brokers, who work for a firm that owns (or is owned by) a mutual-fund company, and independent brokers. You might think the independent brokers gave more unbiased advice—but while that's possible, they also seem more influenced by load payments. The study looked at total loads paid as well as the portion of the loads that went to brokers, and found "significant evidence" that these payments skew broker's incentives across the board, and independent brokers even more so.

More distressing is the evidence that broker-sold load funds result in underperformance in the first year, trailing peers by an average of 1.13 percentage points—before taking the load into account. Christoffersen and her colleagues only tracked performance for 12 months, but "my conjecture is you'd be losing that money going forward; I just can't say how much," she adds.

Revenue-sharing also affected which funds brokers put clients into, but there was no difference in subsequent performance. Because revenue-sharing is an ongoing fee that rises as assets in the fund rise (which should happen if the fund performs well), Christoffersen points out, these payments better align a broker's interest with clients' interests.

Christoffersen referenced a major black eye the brokerage industry received when, in 2004, Edward Jones was found to have 240 mutual-fund families represented on its platform, yet 95% of client money went into just seven "preferred" fund families, which investors were led to believe were preferred because of their performance. But those seven firms just happened to be the only fund companies that made sizeable and regular payments to the brokerage.

A 2011 Financial Industry Regulatory Authority proposal would require brokers to disclose their revenue-sharing or "shelf space" payments, but a similar 2005 proposal was never adopted, says Ron Feiman, a partner with New York law firm Kramer, Levin, Naftalis & Frankel. Revenue-sharing may be disclosed in a fund's prospectus and statements of additional information, Feiman says, but while that might name brokers receiving payments, it doesn't reveal amounts or other details of the arrangements.

MANY BROKERS DISCLOSE revenue-sharing agreements on their Websites, but when was the last time you looked at the disclosures on your broker's Website? Which brings us to another wrinkle in the policy debate: "The vast majority of the public either doesn't understand or doesn't care to reflect on the difference between a broker's advice and an advisor's advice," says Kurt Schacht, managing director with the CFA Institute. "Broker-dealers appear to provide the same services as an advisor, so the client feels they're getting advice when, in fact, they're talking to a sales person."

But investor education, rather than more regulation, may be the answer. "I'm not sure how much more disclosure we can have a broker do," says Bob Pozen, senior lecturer at Harvard Business School and former fund-industry bigwig (at Fidelity Investments and MFS Investments). "There's already a huge amount of disclosure. And I've been very impressed with how much change brokers have made. Ten years ago you could just say 'I'll give you more money to sell this fund.' Today, it requires some rigor to get on a platform."

How much rigor? We'll examine that in a future column. For now, consider this one step in the education.